How Much To Charge for Delivery: A Business Guide

If you run a delivery business, working out how much to charge for deliveries is hard! You’ll have questions like:

• Should I charge per mile, per delivery, or some other way?
• Should I charge for deliveries at all — don’t customers demand free delivery?
• Can I make deliveries profitable?

In this article we’ll draw on more than ten years of working with delivery companies around the world to help you find a delivery charging strategy that works for your business. We’ll look at:

1. Why delivery pricing is so complicated
2. Why you don’t have to offer free delivery — and how to make it work if you do
3. How to work out your cost per delivery
4. How to decide how much to charge for delivery services
5. How to reduce your cost per delivery
6. How to manage customer expectations around delivery charges

Why delivery pricing is so complicated

Working out what to charge for delivery is complicated  because the delivery process itself is complicated! It’s a business cost that’s highly variable depending on factors like:

• Are your deliveries managed in-house or outsourced to a third party logistics provider?
• The size of your delivery area: Are you delivering in a dense urban neighborhood, or a spread-out suburban area with lots of distance between stops?
• The type of vehicles you use: Bike, scooter, car, refrigerated truck? 
• Vehicle fuel types: Electric, gas, diesel, or human-powered?
• Route density, or the number of deliveries per route: On-demand dropoffs to a single address are a lot more expensive than a single route with 30 stops.

Then there’s the tricky problem of customer expectations: Do your customers expect free deliveries? If they do, can you increase your product pricing to maintain your profit margins? 

If you don’t charge for deliveries, and don’t have room to change your product pricing, you could be losing money with every delivery you make.

So should you charge for deliveries, or not? In the next section we’ll consider the pros and cons of free delivery, and how to make it work. Then we’ll explain how to calculate your delivery cost before moving on to what you should charge. 

Can you afford to offer free delivery?

There’s a lot of pressure to offer free delivery. You may see stats like these being quoted:

• 62% of shoppers won’t buy from a retailer that doesn’t offer free shipping. 
• Free shipping promotions increase net sales volume by 11%.
• 47% of shoppers said they would meet a minimum payment threshold to qualify for free shipping.

But if you dive a bit deeper, things aren’t so simple. Here is some more info from the same studies:

• Free shipping leads to higher return rates – as much as 40-50% higher. This is probably because free shipping encourages shoppers to make riskier purchases. 
• Once you factor in higher returns and lost shippings, profits from free shipping promotion decreased by 0.7% even though net sales increased.

We all know there’s no such thing as a free lunch, and there’s no such thing as free shipping either. The only question is: where is the cost being hidden, and who is paying it?

The most common answers are:

• Retailers increase the price of their products to cover the cost of shipping. For example, let’s say your cost to create and package a product is $20, the shipping cost is $5, and you want a 20% profit margin. You can sell it for $29 with free shipping, or for $24 with $5 shipping. (Try out Shopify’s profit margin calculator to get your own numbers).
• Retailers treat shipping as a loss leader to try and build market share.

Free shipping as a loss leader might be fine for the Amazons of this world who can afford to carry the losses — but it’s not a tactic most small retailers can get away with. And increasing price points can make your products uncompetitive. It also penalizes customers who place larger orders — instead of paying one shipping fee for a single big order, they’re paying extra on every single item.

Why do customers love free delivery?

Customers know they’re not getting something for nothing, so why the love affair with free delivery? It comes down to information and communication. It’s not the actual delivery fee that people hate — it’s having the delivery fee sprung on them as a surprise right at the end of the purchase process. 

You’ve almost certainly felt this yourself. It happens all the time: You think you know how much money something is going to cost you, and then at the last minute, during checkout, extra fees appear. Now the total cost is way more than you expected. You may or may not go through with the purchase, but at some level you’re going to feel like you got suckered. That’s not a great customer experience!

Ravi Dhar, the director of Yale’s Center for Customer Insights, nailed it in an interview with The Atlantic:

What bothers [customers] most is the nickeled-and-dimed feeling, not the total amount of the tab.

Later in this article, we’ll look at how better communication can ease the pain of delivery charges. For now, let’s look at more of the advantages and disadvantages of free delivery, and how to make it work for your business, if you decide to go this route. 

Pros and cons of not charging for delivery

There are a few good reasons to offer free delivery:

• It reduces shopping cart abandonment because of “sticker shock”.
• Customers might increase their order value if you set a threshold for free delivery.
• It can help to build customer loyalty.
• You keep up with the competition.
• If offers a nice marketing angle that can lead to higher traffic and sales.

But these can be offset by the disadvantages:

• You still have to cover the cost, probably by increasing your product prices.
• If you choose cheaper shipping options, they will probably take longer and/or offer worse customer service.
• Free shipping can lead to higher returns, which adds even more cost. 

But it doesn’t have to be all or nothing. There are ways to reduce your delivery charges that can still be good for the profitability of your business. 

Six ways to keep your delivery charges low

Here are six ways to make free shipping and/or very low delivery costs work for your business. Experiment with one or more of them and measure the results — then you can see if it’s worth it.

1. Try a limited offer of free shipping to test the waters. You could try for a limited time, a limited subset of products, a certain delivery radius or at certain times of year like before holidays. 
2. Set a threshold for free shipping. A good rule of thumb is to take your average order value (AOV) and set the threshold for free shipping just a little bit higher. That could increase your net sales while also making your customers happy, if you do it right. Shopify has a good how-to guide for this.  
3. Offer free in-store pickups and returns. Ok this isn’t really free shipping, but it can save both you and your customers money while also being more convenient. A lot of people will prefer to pick up a purchase in-store at a time that suits them. 
4. Offer free shipping if they sign up for a loyalty program. This is only really worthwhile if there’s a high chance of getting repeat customers. Selling fresh-baked bread, groceries, pet food, nutritional supplements, or craft supplies? A loyalty programme is a good bet.  But if people are only likely to buy your product once a year or a couple of times in a lifetime, you might be wasting your time. (Wedding rings and furniture are good examples).
5. Offer a free shipping promotion for a limited time to create a sense of urgency. This is a common strategy around Christmas or other major holidays. If you set a hard deadline for the promotion, it has the added benefit of helping you plan for busy periods well in advance. 
6. Offer tiered shipping. This gives your customers a choice. Do they want it free, or do they want it fast? Charging for faster shipping is a common strategy that can be highly effective. 

The image above shows a business using a combination of several different strategies. They do offer free shipping, but only over a minimum order value AND inside a limited delivery area. They also offer free in-store pickups, and a flat rate fee in their preferred delivery area.

Reasons to charge for shipping and delivery

Let’s say you’ve tried some of the experiments above and done your sums, and free delivery just isn’t going to work for you. Here are some reasons why that might not be a problem:

• As e-commerce matures, more customers are willing to pay for delivery. A recent survey by First Insight found a third of the respondents — 62% more than the previous year — said they’d be willing to pay shipping costs of at least $10. 
• Cost is not the only thing customers care about. They also value convenience and predictability and are willing to pay for them.
• Higher-spending customers are more likely not to care about high delivery fees.  

Okay, we’ve spent a lot of time making the point that it’s ok to charge for deliveries, and exploring ways to offset the cost of delivery. But before you can figure out how much to charge, you need to work out your delivery costs. Let’s get to it:

How to work out your cost per delivery

Knowing your cost per delivery is the first step in working out how much to charge. It’s also a key metric that any delivery business should track monthly.  Here’s how to break it down (try out our free delivery cost calculator for the nitty-gritty):

Your cost per delivery is the total cost of running your delivery operation, divided by the number of deliveries you make. 

The costs include fixed and variable components:

Fixed delivery costs

• Back office and administration costs (including rent, wages and software)
• Insurance costs
• Vehicle payments
• Any costs for specialized delivery equipment like trolleys or lifts

Variable delivery costs

• Driver wages. For example, the average delivery driver salary in the US is around $40,000 a year, or $19-20 an hour.
• Fuel
• Vehicle maintenance and repairs
• Toll fees
• Parking fees
• Congestion charges
• Special packaging or handling costs (eg if you’re transporting fragile or high-value items)

The more you can lower your cost per delivery, the less you will need to charge to stay profitable.

💡Use our free delivery cost calculator to work out your delivery cost per mile (or km), and per delivery.

How to work out what to charge for delivery

Armed with knowledge about your delivery costs,  you can zero in on a delivery pricing strategy. Here are some key questions you should ask yourself: 

1. Should I charge per mile, or per delivery?

Charge per mile if:

• You’re offering a courier service, or any kind of delivery that involves picking up a single package and delivering it immediately.
• You’re quoting for a job that you know will involve deliveries, but you don’t know exactly how many, or where you will be delivering to. 
• You deliver over long distances, or the number of miles per delivery varies widely. 
• Your customer expects it (for example, your customer is another business and they have an established system for paying for deliveries).

In general, per-mile delivery charges work when you’re operating as a contractor using your own vehicle, and you need to cover the costs of your vehicle + fuel + your wages at a decent hourly rate. 

It’s a good idea to base your delivery charge per mile on an agreed base cost. Here’s where to find driving costs:

• In the USA, use the AAA driving costs calculator. This gives you precise costs based on the year, make and model of your vehicle.
• In Canada, use the CAA driving costs calculator. 
• In the UK, use the AA’s mileage calculator. You will need to know your mileage per gallon.
• In Australia, follow the ATO mileage reimbursement guide.

If your country isn’t listed above, check out your local AAA equivalent or tax office for guidance.

Charge a flat rate per delivery if:

• You have clearly defined delivery zones that help you work out average costs. 
• You can schedule deliveries in advance and combine many dropoffs into one route. 
• Most of your deliveries are over short distances. 
• You have many customers and it’s important to keep your pricing simple.
• You have high delivery volumes and want to minimize administrative complexity.

If you decide to charge per mile, your job is pretty much complete: Take your base cost, add a time-based wage or a profit margin, and you’re done. 

If you decide to charge a flat rate per delivery, you might want to consider a slightly more complex structure – we’ll look at that in more detail in the next section. 

2. How do I calculate a flat rate per delivery?

Our delivery cost calculator will give you an average cost per delivery. Now you have some options:

1. Charge a single flat rate that’s the same as your average cost per delivery, rounded up or down to a convenient number.
2. Charge different rates depending on distance. For example, you could have a local delivery Zone A where deliveries are free, and a more distant Zone B with a flat rate.
3. Use your average cost per delivery to set a minimum order value for free delivery. For example, if your average cost per delivery is $5 and your average order value is $60, you can offer free delivery for orders that are worth $65 or more. 
4. Give your customers multiple options, for example:some text
   • Pickups in-store are free. 
   • Scheduled delivery within 2-3 days is priced at or just below the average cost per delivery. 
   • Urgent delivery (eg same-day or after-hours delivery) incurs a surcharge. 
5. Combine two or more of these strategies. For example, the wine shop we looked at above combined minimum order value + delivery distance to work out its delivery fees.

Whatever choice you make, remember to keep track of the results. After a couple of months, look at your numbers: if your deliveries are profitable, great! If not — you’ll need to charge more, or look at other ways to lower your cost per delivery. Let’s do that next!   

3. Research your competitors

Finally, when trying to decide what to charge for delivery jobs, don’t forget to look up your competitors’ delivery charges. The average cost will give you a good indication of what customers are willing to pay for delivery.

This will help you be sure that you are charging competitive rates, with prices at or just below the average. 

But remember that every business has different overhead costs — so don’t just match competitor rates if you don’t understand your own delivery costs. 

It’s also always a good idea to reduce your own average cost per delivery as much as possible. In the next section, we’ll look at the top four ways to do that. 

Four top tips to reduce delivery costs

Here are a few things you can do to run your delivery operations more cost-effectively. 

1. Invest in route optimization to increase route density

Route density is the number of deliveries you can make per route, per hour. This directly affects your overall cost per delivery: If you can only make three deliveries per hour, you’re paying a lot more in wages and fuel than if you’re making 10 deliveries per hour. 

To increase your route density, you need route optimization. Route optimization or route planning software like Routific uses smart algorithms to calculate the most efficient routes automatically from a list of addresses. The results can transform a business:

• Route optimization typically leads to a 20%-30% increase in efficiency. The more delivery routes you have, the more the efficiencies add up.
• When delivery vehicles drive shorter distances, you get lower fuel costs. 
• A route planner like Routific comes with a free mobile app for delivery drivers, so they can get all the info they need for their routes directly on their phones.
• You can also improve your customer experience by offering live links for tracking delivery progress in real time.  

2. Start small

If you’re just getting started with making deliveries, it’s a good idea to start small while you’re learning how things work. There are two main tactics to try:

1. Limit your delivery area. Sure, this limits your market — but it also means shorter distances, lower costs, and faster delivery times. It also means your can get route density even with lower order volumes. You can always expand your area later, whereas shrinking it is much harder.
2. Limit your delivery days. To start off, you could offer deliveries only once a week; this way you can collect orders throughout the week, batch them all up, and deliver them all together on a single day.

You could also combine both tactics, and only offer a particular delivery area on a particular day, while delivering to another area on another day. So for example Mondays would be south side, Tuesdays east side, and so on. 

3. Give your customers more options

“Your delivery is scheduled between 8am and 10pm”. This doesn’t really help your customer much. 

By giving customers more delivery options, you can offer greater convenience, predictability, and peace of mind. For example: 

• Buy online, pick-up in store (BOPIS): Customers can make a purchase online and then pick up their order in person when it suits them. 
• Slower delivery: If your customers aren’t in a rush to get their purchase, you can offer a slower, but cheaper, delivery option at a lower cost.
• Parcel lockers: Rather than delivering to the customer’s door, you can deliver to a parcel locker and customers can pick up their packages at their convenience. 
• Delivery time windows: Allow customers to choose their own delivery time window based on when they will be around to receive the package.

All of these combine lower delivery costs for you with a better deal for your customers — that’s a win!

4. Consider extra fees for special delivery services

If a delivery requires specialized equipment or handling, you might need to charge additional fees to make it cost-effective. Here are some cases where an extra charge makes sense:

• Moving heavy or bulky packages that will need extra equipment, time, or labor — think sofas and refrigerators. 
• Rush orders or special services that need more planning time or an extra trip. 
• Deliveries outside regular business hours that will require overtime labor. 

Finally, we mentioned above that great communication can ease the pain of delivery charges. In the last part of this article, we’ll look at how to offer a great delivery experience. 

Managing customer expectations for a great delivery experience

Think about elements of the delivery process that annoy you as a customer. The most annoying delivery experiences include things like:

• Missed deliveries because the driver couldn’t find your address or didn’t read the instructions.
• Delivery services that are impossible to get hold of, or their websites lead you in circles (looking at you, UPS).
• Delivery fees are unreasonably high, or only disclosed at the last moment.
• There’s no choice of delivery options. 
• Deliveries that arrive late, or outside the promised times.
• Your package was marked as being out for delivery in the morning, but now it’s 9pm and you have no idea if it will still arrive today. 

The common factor in all these? Bad information and poor communication. 

As we noted above, your customers don’t necessarily expect or even want free delivery. What they do want is fairness, transparency, and predictability. “How much is shipping?” and “When will my order arrive?” are make-or-break questions that determine whether a buyer completes their purchase. 

There are two ways to make the delivery process more transparent and predictable for your customers: Have a clear shipping policy, and make it easy to track delivery progress in real time. Here’s some more detail:

A. Have a clear shipping policy

Take a look at this graph showing the reasons why potential customers abandoned their purchases at the last minute during checkout:

We’ve highlighted two related reasons: “Extra costs too high” and “I couldn’t see/calculate total order cost up-front”. Both of those boil down the same thing: people HATE being surprised by shipping and delivery costs. (We’re assuming you already have competitive pricing.)

How do you avoid surprises? By being completely transparent from the start (at Routific one of our core values is radical transparency: we believe it’s hard to go wrong by over-communicating). 

What does transparency look like? You need a shipping policy that clearly explains:

• Where you deliver, and where you don’t
• Delivery rates
• Delivery methods
• Time windows and timeframes
• How you handle returns and refunds

Then, put your shipping policy where it’s easy to find. Definitely put it on your FAQ page, and also in the footer of your website, both places where people will look for it. 

And did you know that 64% of users looked for shipping costs on the product page, before deciding to add the product to their shopping cart? Put your shipping costs right there on the product page as well. Every little bit of friction you can eliminate is one step nearer to closing a sale.

B. Make your deliveries more predictable

Customers like fast delivery, but they like convenience and predictability even more — and precise delivery tracking is the way to give it to them. 

Food delivery apps like DoorDash and Uber Eats are great at this, enabling customers to know exactly where their orders are, and when they’re likely to arrive. It might even be one of the reasons that customers are happy to pay the premiums that these apps charge!

But you don’t have to be DoorDash to give your customers this experience. Route planner apps like Routific come with customer notifications and tracking built in. You can automatically let customers know when:

• Their order has been scheduled (down to a half hour time window if you want)
• Their order is on the way — with a live tracking link 
• Their order has been delivered

Routific can also help solve the problem of missed deliveries due to bad addresses or drivers not reading their instructions. Our route planner will flag problem addresses during the planning stage, so dispatchers can fix them before drivers get on the road. And detailed delivery instructions are there to consult in the app. 

Conclusion

To sum up: deciding how much to charge for delivery is hard, but it’s also critical to your business success. Start by knowing your costs, then pick a pricing strategy that fits your business. Note that offering free delivery can help you get more sales, but it can also hurt your profits, especially if you’re a smaller business. That’s why it’s important to crunch the numbers and think about things like how far you’re delivering, what your customers expect, and how many stops you can make on a route.

Finally, be upfront about your delivery costs so your customers aren’t caught off guard at checkout. And don’t forget to look for ways to make your deliveries more efficient—like optimizing your routes—so you can keep costs down and your customers happy.